Tight Credit Tempts Brands to Play It Safe for Fall

For better or worse, the financing climate today is helping shape what shoppers will see for fall.

For better or worse, the financing climate today is helping shape what shoppers will see for fall.

A wariness among lenders on Wall Street and tepid sales on Main Street means the credit that paves the way for apparel to move from overseas factories to U.S. stores has become harder to come by — making it more expensive for many firms to borrow for key fall orders.

That uncomfortable dynamic will be felt throughout the rest of the year as brands and stores stretching their nickels and dimes to place orders are tempted to play it safe and tweak styles that have a proven customer base rather than move on to new looks. And, in the world of fashion, sameness is often more risky than boldness.

"There are a lot of people knocking on the banks' doors right now, trying to get funding," said Matt Katz, managing director at Alix Partners LLC, a restructuring and advisory firm. "The banks will prioritize where they want to lend money, and the lower you are in the pecking order, the higher the cost of borrowing."

There will be continued pressure on retailers to cut prices, especially if stores need to drum up the dollars to fund operations.

"Those who are not able to either generate cash or get additional funding will take less risk in the market place and therefore dumb down assortments," he said.

Trying to minimize risk, though, could turn out to be a gamble.

"In this environment, everybody is vying for the same dollar," said Thomas Burns, senior vice president of The Doneger Group. "If you start playing games and start diluting product and if you start creating an environment that isn't exciting anymore, the customer sees that. The customer is not stupid. They've got a lot of alternatives today."

Andrew Jassin, managing director of the Jassin-O'Rourke Group, a fashion consultancy, agreed: "This is not a moment for boring assortments."

Companies across the pricing spectrum will adapt to the financing climate in different ways.

Discounters are more likely to stick with proven trends. Higher-end players, however, can't stray too far from fashion and will likely continue to chase customers who are buying, such as contemporary shoppers, with new looks, Jassin said.It isn't just retailers who are under the gun, though.

Factories in China, which produce 34.3 percent of the apparel shipped to the U.S., are also being squeezed by higher raw material and labor costs, a weakened dollar and an appreciating yuan on top of tepid demand among American consumers.

"These factories, they don't have the wherewithal to hedge the currency," said Michael Stanley, executive vice president of factoring firm Rosenthal & Rosenthal.

That means producers are looking for ways to protect themselves.

"They're asking their customer, the importer so to speak, to pay upon shorter terms, requiring deposits," said Stanley, noting this creates a cash flow burden and makes it harder to tackle quality-control issues.

Accordingly, producers are taking a keener interest in the financial health of their U.S. retail partners.

"Over the last months, we have seen an increased volume of requests for information being made from these suppliers to our offices, especially in Asia, asking about particular buyers," said James Hogan, HSBC's head of trade and supply chain for North America.

The question tends to go something like this: Is it true what we're reading in the newspapers?

"You have these temporary requests for more information and, in certain cases, suppliers thinking about reverting back to selling on a letter-of-credit basis," said Hogan. "We're seeing some signs that a letter of credit might be a better way of doing business for the moment, although this is a short-term phenomenon."

Retailers and brands over the last couple of years have moved away from using letters of credit, in which a bank guarantees payment of orders, to using open-account payments between importers and factories.

This switch reflects the shifting sourcing landscape with larger brands turning to fewer suppliers to better control production. Buyers and sellers have become more important to each other, with longer-term relationships and a greater degree of trust, financial and otherwise.

There is plenty of reason for producers to want assurances that they will be paid given the difficult retail environment as evidenced by a string of Chapter 11 filings. Like Sharper Image and Linens-N-Things before it, the 355-door Goody's Family Clothing Inc. went into bankruptcy protection this month, making suppliers among the last to be paid.Other regional players are also said to be on shaky ground as they try to tread water in the weak economy and compete against better-funded national chains.

The Talbots Inc. has also felt the pinch of the credit market, and its stock price dropped in April when it disclosed that Bank of America and HSBC were pulling their letters of credit.

The retailer said producers of roughly three-fourths of its purchases abroad had agreed to "open-account" terms, giving the store 45 days to make payments.

This month, Talbots' majority stockholder, Aeon Co. Ltd., agreed to provide the firm with a $50 million unsecured subordinated working capital term loan credit facility that will mature in January 2012.

"This new credit facility will provide us with an additional level of assurance and even greater flexibility to weather the current uncertainty in the credit markets," said president and chief executive officer Trudy Sullivan.

The initial source of all the retail industry's angst is the shopper, who sets the tone for business and, as of now, is offering little hope of a sustained turnaround.

"The consumer is really now starting to feel that hit to his disposable dollar that was anticipated by the stock market some time ago," said Stanley Officina, president of Ultimate Financial Solutions. "And there's nothing terribly optimistic about the way they're talking about the price of oil."

Rising oil prices helped push the price of a gallon of regular gasoline over $4, according to the American Automobile Association.

"You have a whole bunch of negative currents running though this market," Officina said. "At the same time...some hold a ray of sunshine. Fortunately, the [comparable-store sales] last month seem to have been pretty good, which certainly goes a long way to easing some of the fear."

Despite the welcome respite in May from what has been a dour year for sales, Officina said importers will take the overall economic and consumer weakness into account as they gear up for another season.

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